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Retailers are offering a slew of payment options to cash-strapped consumers. But will these new methods end up costing shoppers more?

How you pay for holiday purchases this season is just as important as the size of the deal you get.

As banks slash consumers’ credit card limits and restrict new accounts to those with stellar credit scores, some shoppers will need to look for other ways to fund their holiday shopping endeavors. “It’s harder to put Christmas on credit this year,” says Daniel Horne, an associate professor of marketing at Providence College in Rhode Island.

Many shoppers will simply pull back altogether. According to a recent report by industry market researcher Deloitte Touche Tohmatsu, 59% of consumers plan to reduce holiday spending this year. Girding themselves for a tough sell this holiday season, retailers are offering shoppers a variety of new — and old (welcome back, layaway!) — payment methods to entice shoppers to spend. To sweeten the deal, they’re providing discounts and other incentives to shoppers who use them.

But be cautious: if you’re not careful, using the wrong payment method can end up costing you more in the long run. And most don’t hold a candle to the purchase protections offered by credit cards (see below). So, before hitting the mall, weigh the advantages and disadvantages of your payment options:

Store Credit Cards

Pros: “The real advantage of a store card is the special deals you get,” says Gerri Detweiler, credit advisor for debt management site Credit.com. While these cards are nothing new, desperate retailers are extending even more perks to cardholders this holiday season. Banana Republic is currently offering 25% off for opening a store account — 10% more than the clothing chain’s usual offer. Macy’s recently sent cardholders a bonus discount card worth $10, $20, $50 or $500 should they use their Macy’s card for their next purchase.

Cons: Annual percentage rates on retailer credit cards can easily top 20%, which quickly eclipses discounts if you don’t pay off balances in full each month, warns Detweiler. Opening several new store cards and racking up balances can also wreak havoc on your credit score. So limit yourself to one new store card this holiday shopping season.

Layaway

Pros: This ’80s throwback lets shoppers snag must-have gifts now, while avoiding interest charges as they pay off the balance over time, says Susan Grant, director of consumer protections for the Consumer Federation of America, a consumer advocate group. And it’s becoming much more widely available. Online service eLayaway works with more than 1,000 retailers, including Apple and Brookstone. Setting up a layaway contract costs a nominal fee — chains like Kmart, Burlington Coat Factory and Fashion Bug charge $5.
Cons: If you stop making payments or change your mind about the products you’re paying off, most stores will assess cancellation and restocking fees of another $5 to $10. You also risk overpaying if the item later goes on sale — a likely scenario considering that retailers will try to offset any lackluster holiday sales by slashing prices.

Online Payment Services

Pros: Pay for your online purchases using a service like PayPal, Bill Me Later or eBillme, and you can pay for today’s purchases later — using your choice of payment method (credit card, checking account or even cash) and often without accruing interest. Many of these secure services offer holiday promotions. Starting Nov. 19, PayPal is offering 15% cash back on an Overstock.com purchase of $100 or more. Bill Me Later merchants like Wal-Mart and Toys R Us are extending offers of no payments for up to 90 days.
Cons: Alternate payment services can have a host of pitfalls, including fraud protections that falls short of those that credit cards offer. Check the policies for loopholes before you buy, and consider using a credit card to lend added security for transactions with other individuals (say, eBay sellers) and businesses you aren’t familiar with, says Ruth Susswein, a spokeswoman for consumer advocate Consumer Action.Be especially careful with services like Bill Me Later and PayPal’s Pay Later, which function as lines of credit. Interest rates are similar to those of store credit cards if you don’t pay the balance in full before promotions end. Because these lines of credit are meant for consumers with high credit scores, getting approval isn’t easy, and can negatively impact your credit score if you open a new account, say spokesmen for PayPal and Bill Me Later.

CashPros: Believe it or not, paying in cash can net you discounts from some local businesses. Cash is immediate profit, and stores also avoid the bite of credit card issuers’ merchant fees. Ask at the checkout counter if you can snag a better price for using cash.

Cons: There’s no recourse for loss or theft, or if there’s a problem with your purchase (say it turned out to be fake, or you lost the receipt required for a return), says Scott Bilker, founder of money management site DebtSmart.com.Standard Credit Cards

Although it’s harder to put every purchase on plastic this year, it’s still worth using a credit card in some cases — that is, as long as you can stick to a budget and pay off the balance in full each month. Credit cards routinely offer purchase protections, including extended warranties, longer return periods and zero liability for fraud.”Issuers know you’re going shopping, and they’re hungry for business,” says Bilker. “Call and ask for a reason to use their card — you can usually snag a low promotional rate.” To get even better deals, check your issuer’s Web site for bonus holiday offers. Chase cardholders earn bonus rewards for spending through Dec. 31, while MasterCard offers discount coupons like $50 off a $250 Zales purchase.

Keep an eye on your credit limit, too, advises Susswein. Going over can result in nasty fees and jacked-up interest rate.

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